Sigurdardottir will serve as Iceland's prime minister until the next round of elections, set for April 25. She replaces Geir Haarde, who stepped down last week after protests over his handling of an economic crisis which has left the island nation near bankruptcy.

The 66-year-old Sigurdardottir, who is also the world's first openly gay head of government, has her work cut out for her.

"This government's primary objective will be responsible fiscal control," she said at a news conference. "First and foremost, we will focus on urgent matters regarding the businesses and homes of this country."

The coalition of the Social Democratic Alliance and the Left-Green Party said it would stick to the recovery program agreed with the International Monetary Fund, which came to Iceland's rescue with a $10 billion bailout package.

Government pledges fast action

Left-Green leader Steingrimur Sigfusson, who will serve as finance minister, will set up a monetary policy commission to make decisions on interest rates, bank reserves and cash requirements, the government said in a statement.

It added that it would act quickly to remove central bank bosses, and plan a series of public works projects to boost employment.

Some analysts are already warning that the new government may not be able to make much headway in tackling Iceland's enormous economic problems in the short period until elections in April. But Sigurdardottir's administration will at least no longer be crippled by the widespread public mistrust which brought down her predecessor.

"The major change is maybe that now you have a government that the Icelandic people will be inclined to trust," Birgir Gudmundsson, professor of media and politics at the University of Akureyri told Reuters news agency.

No word on EU membership

The new government has not yet addressed an issue on many people's minds following Iceland's collapse -- namely that of a speedy membership process to join the European Union. That is a question that is expected to be debated in April's election.

The government would only say that both coalition parties agree that membership in the EU could only be decided on the basis of a national referendum.